It is a moral issue

If you are old enough, you can remember the Profumo affair of the 1960s. A junior Minister of Defence was discovered to have had an extra-marital affair with a young woman who had also been involved with a Russian naval attaché. It caused a tremendous furore, of course, as it had all the elements loved by the media and the public – pretty girls, politicians caught in flagrante, a touch of spy mania and the red menace. Macaulay had written many years before that there was “no spectacle so ridiculous as the British public in one of its periodical fits of morality. Richard Davenport-Hines wrote the central work on the affair, An English Affair: Sex, Class and Power in the Age of Profumo, and spoke of 1963 as a year when “the soapy scum flowed after the sluices of self-righteous scurrility were opened”. However, my memory was that there was little talk of morality involved. Quintin Hogg, then Lord Hailsham, was regarded as rather old-fashioned when he insisted that “this is a moral issue”. People said that they were not interested in the sex, dear me no, people should lead their own private lives, no, we’re terribly modern here, not a moral issue at all, what mattered was the security issues. That, and he lied to Parliament. But not the bonking, we’re relaxed about that. Really. But “wrong” – what does that mean ?

Cut to the present. What we have is something infinitely more important than a minor politician being caught in the wrong bed. We have societies all over the western world fracturing under greater pressure of inequality. The share of national income going to the top 1%, and the top 0.1% has doubled between 1979 and 2007. In the USA, top executive remuneration has risen by 37% since 2009. In 1975, it was just 20 times Chief executives at America’s 350 biggest companies were paid 20 times as much as the average worker: in 2011, 231 times as much. These are astonishing figures, and Deborah Hargreaves of the High Pay Commission shows that they are replicated here. The trend for very high executive pay started in the USA, but has spread (you may say infected) the UK and other economies. This is all going on at a time when the incomes of the mass of people are static or falling. The question is – why is it happening ?

There are two competing schools of thought. One explanation is simply greed, that top executives have found out they can grab a larger amount of the wealth that comes through their hands, and they are tucking in enthusiastically. This is technically known as ‘rent-seeking’, but you and I might introduce similes about snouts and troughs. David Marotta’s article in Forbes compares rent-seeking behaviour, ever so gently, to piracy. He nevertheless points out that “rent-seeking never encourages productivity. The production of valuable goods and services is maximized with strong property rights when little is wasted in efforts to seize the surplus of others or to prevent others from seizing our surplus. During a strong economy there are fewer incentives for rent-seeking because production is highly rewarded. But when economic times make it more difficult to produce, it becomes more attractive to rent-seek someone else’s surplus”.

There is a rival theory, one that claims we are experiencing a long term change in the nature of the economy, which has become ‘hourglass shaped’ – there is a demand for jobs at the very high skilled end of the market, and jobs at the low skill end, but the demand for semi-skilled and skilled manufacturing and administrative jobs in the middle has declined. This is said to be due to various factors – computerization of administrative tasks, globalization of manufacturing, and so on. This argument also claims that the high pay of top executives represents their extraordinary abilities, abilities that are scarce and have to be bid for. It’s worth a few millions to keep on board an employee who can add billions to a company’s value.

Why do I find the first theory more attractive than the second ? Well, a number of reasons. The argument that top executives have extraordinary abilities that must be rewarded seems at odds with common stories of executive performance – where men (and it’s almost always men) get paid very large sums of money to ruin a company or a bank. An example from today’s paper: the chief exec who dragged Serco through the mire of allegations of lying to maximise government contracts has just been paid off with £7m. Think what he would have got had he raised the company’s reputation. The timid rebellions that have happened (“shareholders’ spring” indeed !) have usually occurred when investors have reached their wit’s end about executives enriching themselves whilst their business fails. As Nils Pratley pointed out in the Guardian, the company AGMs may have provided more entertainment:

the directors of insurance giant Aviva were accused of being “more concerned about their remuneration packages than growing our business”.

at Man Group, the hedge fund manager with a shrivelled share price, the highly paid chief executive was asked, witheringly: “Sir, does it really feel like a $7m year to you?”

but whilst investor revolts have claimed some scalps, radical reforms to how companies are managed and directors paid is years off.

I would also wonder how a social movement on the scale – a 30% hike in two or three years – can possibly be the result of long-term economic factors. It’s simply too quick for that to be true. And weren’t firms in the 1970s in need of exceptional individuals to run them well ?

Another reason I’m sceptical is that the behaviour has bled into the public and charitable sectors. Head teachers used to earn about twice what their average staff member earned. It would now be, I guess, four or five times as much. I can remember being recruited as a Principal for £47,000 in 1992 and retiring on a salary of £110,000 ten years later. The news from the BBC, from local authorities confirms the same stories. Last year, at least 30 charity heads enjoyed six figure salaries. I suppose you could say that the public and charitable sector has to compete with the private sector for the extraordinary talent (see above), but I was not aware that Private Colleges PLC was scouting for my services, and I’m damned sure start-up media companies won’t be employing the BBC’s dumped head of Human Resources for £320,000 any time soon. And being head of a charity or working for a public body used to be a position of respect, not another rent-seeking opportunity.

And then one must ask why the downward pressure on wages is happening in areas – like hospital cleaning or social care visits – where there is no competition from the Far East nor possibility of computerisation. The Guardian reported this week that many care homes are trying to pay less than the minimum wag for staff involved in the care of the old. The reason that those workers are squeezed is not due to secular movement of labour demand, but simply because they are powerless.

You can argue that sorting this injustice out would be good for society, and good for the economy. There are certainly powerful arguments on that side. However, what’s wrong with saying that it is a moral issue ? People are behaving in an unacceptably ruthless way. A recent book draws attention to the problem of people behaving like assholes. In other areas of our life we use the law to restrain the selfishness of individuals. We should do so here. The study of the benefits of more equality The Spirit Level has been attacked (of course) by those wanting to avoid any action against the rich, but still seems to hold up pretty well to me. Interestingly it points to countries that have made the choice of greater equality, which is now including some surprising names such as South Korea. A look at other countries shows more decisive action against executive pay abuses: in Australia, a board that resists the wishes of shareholders to review executive pay has to put itself up for re-election. The Swiss (!!) too have taken action. The US government forbade executives from companies rescued by the state from having incomes over $500,000, though the tide is going out there as the economy recovers. If you agree with me, inequality is not inevitable, it is, as Nobel Laureate Joseph Stiglitz recently showed in the New York Times, a choice.

Footnote: one galling part of the rip-off culture is that forms are now aware we think badly of them, and so pretend to enormous concern about social issues. Eat enough chocolate bars, and the company will give sports equipment to schools. TV advertisements are full of green claims, of pretty children and winsome old folk being helped by our corporate friends. Firms keep claiming the high ground – a commitment to care, to community, to what matters to you and your family as they do ever more shitty things